Finance
6 Risks That Kenyan Forex Traders Should Be Aware Of
Business ventures have risks involved and in a decentralized system such as forex, there are factors that an investor would want to look out for as one trades. Kenyan Enterprise has compiled a list of the main risks involved in forex trading for Kenyan investors.
1. Credit risk
An individual trader has a lower credit risk in comparison to financial institutions such as banks that are more vulnerable to an outstanding currency position.
This is why investors who choose a broker are advised to seek a broker who is regulated by the capital market authority to easily deal with financial disputes.
- Country and liquidity risk
The risk of devaluation of a country’s currency can have effects on the prices and trading patterns.
Forex trading accommodates speculative investing and if multiple investors have the familiar notion that the currency of a country will devalue, there will be a rush to cash out. This will further devalue the currency, and investors who do not cash out in time will face a liquidity dilemma.
3. Transactional risk
In forex trading, currencies will be traded at different prices depending on the differences in time. Transaction risk would manifest due to errors when communicating a trader’s orders which will result in losses.
4. Interest rate risk
There is a correlation between interest rates and the influx of investments in the country’s assets. The currency of a country will weaken especially when the investors withdraw their investment due to a fall in the interest rate.
5. Counterparty risk
Every forex broker has a contract with a company that provides the assets to the investor. The counterparty risk will occur during a volatile market when the counterparty may not have the ability to adhere to the contracts. This is because spot and forwarding contracts on currencies aren’t guaranteed by a clearinghouse or an exchange.
6. Leverage risk
In forex trading investors gain access to multiple trades in foreign currencies through margins. Margin calls occur during small price fluctuations. Investors who engage in rapid trades are more likely to incur substantial losses as they are prone to overuse their leverage. Investors who have medium or long terms positions are less likely to incur leverage risk.
